The Bundesbank will reject the new ECB instrument if conditions are not imposed on countries like Spain

The monetary authorities of the euro are designing a new bond purchase program to limit debt spreads and avoid an uncontrolled spiral of the risk premiums of the most indebted European countries, as is the case of Spain. The details of the design are not yet known, but the president of the German Bundesbank, Joachim Nagel, already anticipates his skepticism.

Nagel intends to deny his approval of the new instrument of the European Central Bank (ECB) if he does not establish conditionality to the governments of the beneficiary countries. "As central banks, we must not expose ourselves to fiscal risk," he declared at an event at Frankfurt's Goethe University, in which he argued that the impression should not be given that central banks are preventing fiscal policy from starting the budget consolidation. “I said that I would not rule out such an instrument in general, but that I would make my approval depend on this conditionality if it were the case,” he revealed.

The President of the Bundesbank has also said that cross compliance has to be designed clearly and in such a way that it is justifiable. There must also be, in his opinion, a proportionality in the way in which said instrument is used. “The discussion will still have to take place and I will take an active part in it”, he has pointed out, “the design of the program must be based on the experience with the OMT program of the ECB”. Nagel insists that the ECB's mandate is clearly price stability and acknowledges that the new instrument may hinder the fight against inflation. “The focus now needs to be on that and the other issue, if it is resolved correctly then I can also be a supporter, but there is still a lack of data and we must first know the solution in detail before positioning ourselves.”

The Bundesbank is hastily analyzing the information that is arriving from the ECB and that will be put on the table at the Council meeting on July 21, after the body was called to an emergency meeting in June in which the Monetary regulators decided, among other things, to quickly complete the development of the new instrument. Design work has started from the so-called OMT program, to buy unlimited government bonds from eurozone countries that have been under pressure due to the pandemic. However, to be included in that programme, the affected euro countries must apply for a European aid programme. In the design of the new instrument, many governments want to avoid this requirement and Germany is in favor of maintaining conditions.

Another concern that Nagel will convey to the Council at the next meeting is that of the parity of the euro with the dollar. The common European currency is becoming a growing problem for Germany, at its lowest point in the last 20 years and weighing down the German economy. While the weak currency has long been synonymous with successful exports and therefore growth in foreign trade, today a weak euro no longer helps exporting companies, but rather raises the costs of medium-sized companies and makes the lives of consumers.

"The export-promoting effect of a weak currency is eaten up by the extreme rise in import prices for primary products," explains Sonja Marten, director of currency research and monetary policy at DZ Bank. From her point of view, the current weakness of the common currency is nothing more than an accelerator of inflation and this includes the dangerous increase in energy prices. Brent oil is trading close to its record high in euro terms, while it is still a long way off in dollar terms. And the same happens with gas, essential for the operation of German industry and for the supply of electricity. In previous crises, a relatively strong euro partially cushioned the rise in oil prices and supported purchasing power. But now, from a German perspective, the parity makes the energy bill more expensive by 11% so far this year and threatens to continue raising that percentage throughout the second half.

The full extent of the loss of prosperity can be seen in the German trade balance: in May, the former world export champion ran a trade deficit for the first time since 1991. Such a deficit is a first for Germany, but affects the entire euro zone. as a whole. Already in April, the bloc posted a deficit equivalent to $37 billion where, just a year ago, the monthly surplus was an impressive $290 billion. It is mainly energy exports, notably from Russia, that are pushing the continent's trade balance so sharply into deficit. Deutsche Bank has calculated that there could even be a gap of more than 400,000 million dollars in the trade balance in a period of twelve months, with serious consequences. A negative trade balance increases devaluation pressure and increases the danger that the common currency will continue to fall in the near future. The deterioration of these "terms of trade" weighs down the economic growth of the euro zone and, therefore, future prosperity.

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